COMMENT: Envelopes

By bne IntelliNewsJuly 2, 2012

Renaissance Asset Managers -

When the prime minister comes to sell you an IPO, you, the investor, take the meeting. When that prime minister turns up with no bodyguards and shows remarkable knowledge of the company he is promoting, you, the investor, take notice. When Nika Gilauri, the premier of Georgia, tells you that the prosperity of his country has been achieved because it has become one of the "least corrupt" countries in the world, you, the investor, take note.

But it wasn't always like that. After the demise of the USSR, Georgia was not only one of the most corrupt of the former- Soviet republics, it was one of the most corrupt countries in the world. Bribe-to- drive was the norm; police stopped cars at least twice an hour to extort a non-trivial sum of money. The then-interior minister infamously quipped: "Give me petrol only. My people will take care of their own salaries." Being a traffic cop was so lucrative that you had to pay a bribe of between $2,000 and $20,000 to get the job in the first place. Graft was endemic. Georgians passed more envelopes to bent officials than the post office does letters. Meanwhile the economy crumbled and the state was left bankrupt and powerless.

The election of Mikhail Saakashvili changed everything. A bold reformer, he was swept to power in the "Rose Revolution" at the end of 2003 by the overwhelming desire for radical change. His closely-knit team is unified by a common vision and supported by a compliant parliament and judiciary.

The new government wasn't just radical - it shocked and awed. Ministers, oligarchs and officials were sacked or arrested. Those who resisted were dealt with decisively, sometimes brutally. The state confiscated $1bn worth of property. Customs officials bore collective responsibility; an entire shift would be punished if one officer was caught accepting bribes. Corrupt professors were kicked out with a lifetime ban from academia. But the piece de la resistance was Saakashvili's order to sack the entire 16,000-strong police force on a single day, to replace them with some of the best and brightest university graduates. Today, Georgia ranks alongside Finland as having the least corrupt police force in the world and their standout uniforms are rumoured to have been designed by Armani.

The campaign expanded irresistibly. Tax offices were equipped with CCTV; university exam papers were printed in the UK and held in bank vaults until needed; and officials were constantly tested in sting operations. The proactive assault on graft was accompanied by a PR campaign to undermine respect for criminal groups and introduce respect for the law.

The campaign then turned to the sectors. First up was the power sector that was widely used as a cash cow for well- connected oligarchs. In less than a year, Georgia went from net importer to exporter of electricity and the sector became the target of long-term foreign investment.

Tax collection followed. Georgia's tax base consisted of just 80,000 companies in 2003 and tax collection was a mere 12% of GDP. Saakashvili slashed red tape and introduced flat personal and corporate taxes. Eight years later over 250,000 companies are on the register, and pay the equivalent of 25% of GDP. Georgia now boasts one of the most liberal tax regimes in the world, on par with the Gulf states and Hong Kong.

Lastly came deregulation, with many rules and agencies simply abolished, removing channels of corruption in the process. Among other things, car registration became so easy that used cars became the largest export item in 2011. Georgia moved swiftly from the bottom of the World Bank's Doing Business ranking (112) into the top 20 (16) by 2012. Foreign investment followed and fuelled a multi-year surge.

But perhaps, the most lucrative Georgian export would be the fight against itself, from which many states mired in graft could benefit. The Georgians patented a process whose steps are replicable: establish early reform credibility by radical action, launch a frontal assault excluding no sacred cows, attract new blood, limit the role of the state via privatisation and deregulation, use technology and communication to maximum effect, and above all, be bold and purposeful. Georgia's close and distant neighbours should take heed. Their prime ministers and presidents have got their job cut out for them.

Juha Kähkönen of the IMF - The Caucasus and Central Asia (CCA) region continues to navigate a wave of external shocks – the slump in global prices of oil and other key commodities, the slowdown ... more

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